A Closer Look at Vodafone Group's Dividend Potential

LONDON -- Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of Vodafone and assessing whether the company is an appetising pick for income investors.

How doesVodafone's dividend history stack up?

Metric

2010

2011

2012

2013

FY dividend per share

8.31 pence

8.9 pence

9.52 pence

10.19 pence

DPS growth

7%

7.1%

7%

7%

Dividend cover

1.9 times

1.9 times

1.6 times

1.5 times

Source: Vodafone company accounts.

Vodafone has increased the dividend at a consistent rate in recent years, and has hiked the full-year payout even in times of severe earnings pressure -- the firm kept dividends rolling in 2012 despite an 11% EPS dip that year.

This steady dividend growth in spite of patchy earnings has pushed coverage away from the widely regarded security threshold of two times prospective earnings, however.

What areVodafone's dividends expected to do?

Metric

2014

2015

FY dividend per share

10.41 pence

10.51 pence

DPS growth

2.2%

1%

Dividend cover

1.6 times

1.7 times

Dividend yield

5.4%

5.4%

Source: Digital Look.

Vodafone announced earlier this week that group revenues slid 4.2% in the year ending March 2013 to 44.4 billion pounds, although this did not prevent operating profit advancing 9.3% to 12 billion pounds. Falling turnover was attributed to driven by sustained weakness in Southern Europe, where service revenues collapsed 16.7%, while regulatory difficulties on the continent also crimped performance.

Still, the firm remains optimistic that its data, enterprise and developing market operations should continue to make headway, while its Verizon Wireless joint-venture with Verizon Communications -- in which service revenues advanced 8.1% on-year in 2013 -- also continues to charge higher.

EPS is predicted to keep moving skywards over the medium term, according to broker forecasts -- a 4% and 6% expansion has been predicted for 2014 and 2015 respectively. Dividend growth is expected to thus continue rumbling higher during the period, albeit at a vastly lower rate than in previous years, although this will drag dividend cover back toward two times forward earnings.

How doesVodafone's dividend prospects rate against the competition?

Prospective Dividend Yield

Prospective P/E Ratio

Mobile Telecommunications

4.5%

15.4

FTSE 100

3.1%

16.7

Source: Digital Look.

Vodafone was recently dealing on a P/E rating of 11.8 for 2014, representing a chunky discount to the prospective readings of both its sector peers and the FTSE 100, while it also beats both of these groups hands down in terms of projected dividend yield.

In my opinion, Vodafone is an excellent stock market selection for those seeking reliable dividend growth. The firm has an excellent track record of raising payouts, even in times of earnings pressure, and I expect the company's focus on key strategic areas should underpin long-term growth and help it to negotiate current travails in Europe.

The inside track to growth elsewhereIf you already hold shares in Vodafone and are looking to significantly boost your investment returns elsewhere, check out this special Fool report, which outlines the steps you might wish to take if you are hoping to become seriously rich from other shares.